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Strengthening WASH businesses in Ethiopia – tariffs and taxes on sanitation products

Published on: 27/05/2021

Taxes and tariffs imposed on sanitation products significantly increase the cost of the product and affects affordability.

SATO pans for sale in Amhara Region, Wore Illu Woreda - Photo by: Tsegaye Yeshiwas

In a series of posts, we will present the main challenges that businesses face when expanding their range of WASH products and services in Ethiopia. We will also highlight a set of recommended regulatory and policy actions to overcome these challenges. This is the fourth out of eight posts. It covers challenges related to taxes and tariffs for sanitation products and services.

According to the UNICEF/WHO Joint Monitoring Programme, only seven percent of Ethiopians have access to basic sanitation services (JMP, 2019). Achieving universal access to basic WASH services in the country requires further development of the country’s private sector. The Government of Ethiopia recognises the importance of the private sector in generating demand and creating access to materials and services for construction of improved latrines and leads market-based sanitation efforts (FMoH, 2016). However, the current market for WASH products and services meets only a fraction of the country-wide need. To gain more insight, the USAID Transform WASH team talked to more than twenty key informants (business owners and government officials) in Ethiopia and the East Africa region to identify the main challenges facing WASH market development in Ethiopia.

To learn more, follow this link to the full Learning Note.

Overview of tariffs and taxes

One of the primary challenges that businesses face in Ethiopia is taxation, which significantly increases the cost of goods to customers, particularly for imports (sum of taxation can be up to 50% of the retail price). To promote domestic manufacturing, the Ethiopian government follows an “import substitution” model, using import tariffs (duties) to raise the cost of imported finished goods and selectively reducing duties on imports of raw materials used to manufacture goods domestically. In the price-sensitive WASH market, relatively low demand can prevent businesses from achieving profitability when introducing or expanding a WASH product and service portfolio. As both imports and domestically produced products are key components of building any nascent market, current levels of taxation should be considered a major impediment to market growth.

Goods imported into Ethiopia are subject to up to five different types of tariffs and taxes, including customs duties, value added tax (VAT), surtax, excise tax, and withholding tax – all of which generally are added into the retail sales price paid by consumers.

  • Customs duties are applied to imported goods and can range from zero to 35 percent, depending on how government classifies the item as a raw material which will be further developed locally or a finished product to be sold directly.
  • Excise tax is typically levied on items considered “luxuries” (e.g., perfumes) or goods that are hazardous to health (tobacco products and alcoholic beverages).
  • Value added tax (VAT) of 15 percent is levied on imported goods, as well as on all domestic sales transactions where products are sold and change hands.
  • Surtax is a flat 10 percent fee used to raise additional revenue on certain products. It is based upon the sum of customs value, customs duty, excise tax, and VAT. Some products have been exempted from surtax, including fertilizer and petroleum (Kebede, 2019).
  • Withholding tax is applied to all purchases (3% for imported goods and 2% for domestic goods).
Tariff and tax relief and reform

An example of how taxes and tariffs affect the sanitation sector is provided by the SATO pan, a low-cost toilet improvement option, which is currently imported into Ethiopia at a cost of 152 ETB from a manufacturer in Kenya. SATO pans are classified as “finished products” so they are subject to the following tariffs and taxes:

  • Customs duty of 30 percent
  • VAT of 15 percent
  • Surtax of 10 percent
  • Withholding tax of 3 percent.

With all relevant tariffs and taxes applied to this product (and no credits applied for previous VAT payments) as well as profit margins, the pan’s consumer price more than doubles from around 200 ETB to nearly 500 ETB full retail price (Kebede, 2019). This poses a significant challenge to SATO retailers – the tax-induced price increases make the product difficult to sell, particularly to lower income customers.

In the interest of keeping the price of SATO pans as low as possible and help establish them as a new market entry in Ethiopia, the government has permitted the first few rounds of bulk imports to be exempted from customs duties; however, a long-term solution is not yet in place.

The government is presently engaged with interested parties in proposals to reduce or eliminate customs duties and taxes on a range of WASH products, such as low-cost sanitation items, menstrual pads, and household water treatment products. In early 2021, Ethiopia recognised menstrual hygiene management products as essential items and reduced custom duties from 30 percent to 10 percent (MoFEC, 2021).

A long-term solution to the tariff and tax issues on WASH products will require that the Ethiopian Revenues and Customs Authority and the Ministry of Finance get involved to re-classify certain products as “priority” items or take other relevant steps to help keep the cost of these products as low as possible.

The VAT is an especially challenging tax due to its outsized importance for government revenue and complicated administrative implementation. It accounts for 41 percent of total federal domestic revenue and thus is a very important income source for the government and is applied on imports and all subsequent product sales transactions. In principle, it should be possible to deduct VAT charges paid in previous transactions throughout the value chain. However, in practice this procedure, which requires accurate accounting and reporting, is not always possible.

Some outlets and retailers may be exempt from charging VAT (e.g. when annual turnover is less than 1,000,000 ETB), and instead pay a turnover tax (similar to a sales tax) of two to 10 percent.

Although there are procedures for adjusting VAT payments based on prior amounts paid, it is likely many businesses do not follow these procedures due to a lack of understanding of how the process works (Kebede, 2019). The consumer ultimately covers the cost of VAT and all other applied taxes.

Recommendations

Steep import tariffs and a range of domestic taxes can greatly increase the cost of sanitation and other critical WASH products. This lowers overall demand and places additional economic burdens on poor households. We recommend the following actions:

  • Complete ongoing research to understand the effects of lowering tariffs and taxes on sanitation products, including influence on consumer demand and government revenues.
  • Review and revise the classification of imported WASH products to ensure critical items can be readily imported.
  • Review and revise import tariff and domestic tax rates and policies to ensure critical WASH products are as affordable as possible to households.
  • Provide training on VAT to raise awareness on accounting and reporting processes among stakeholders.

About Transform WASH
USAID Transform WASH aims to improve water, sanitation and hygiene (WASH) outcomes in Ethiopia by increasing market access to and sustained use of a broader spectrum of affordable WASH products and services, with a substantial focus on sanitation.

Transform WASH achieves this by transforming the market for low-cost quality WASH products and services: stimulating demand at the community level, strengthening supply chains, and improving the enabling environment for a vibrant private market.

USAID Transform WASH is a USAID-funded activity implemented by PSI in collaboration with SNV, Plan International, and IRC WASH. The consortium is working closely with government agencies, including the Ministry of Health, the Ministry of Water, Irrigation and Electricity, the One WASH National Program, and regional and sub-regional governments.

 

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